Latvia wary of Russian cash influx from Cyprus

Eurozone hopeful Latvia insisted Friday it would not become the new Cyprus as rich Russians look for a new safe haven to deposit their cash.

"Statements that Latvia could become 'Cyprus number two' are not true," said the head of the Latvia's FKTK financial market regulator, Kristaps Zakulis.

The FKTK said supervisory measures for monitoring non-resident money flows into Latvia are in place and asked banks this week to redouble their assessments of their customers and the quality of financial flows in view the Cyprus crisis.

The proposal of a levy of up to nearly 10 percent on Cypriot bank deposits as part of the country's bailout plan sent shockwaves through Russia as many of its companies and wealthy individuals use Cyprus as an offshore financial banking centre thanks to favourable tax and regulatory agreements.

While the proposal was shot down by Cypriot lawmakers, the idea has not been completely buried and large depositors are still at risk of losing a portion of their funds in the eventual bailout.

When Cypriot banks reopen eyes will be on Latvia as a possible destination for large transfers of funds.

Its banking sector already attracts a large number of depositors from Russia and other CIS countries, largely due to the fact that there is a significant Russian-speaking community remaining from Latvia's days as a Soviet republic.

According to official figures, around half of the 12 billion lats (17 billion euros, $22 billion) worth of deposits in Latvian banks come from non-residents, and they grew by more than 20 percent in 2012.

According to the International Monetary Fund (IMF), up to 90 percent of that comes from Russia and other CIS states.

While Latvia's top two lenders are units of Swedish banks, the country boasts a dozen boutique banks that cater to foreign customers and offer Russian-language services.

Rietumu Bank, one of the most successful of those, said earlier this week that it had extended its opening hours at its foreign branches to cope with "a large number of enquiries related to the situation regarding the financial system in Cyprus."

Mikus Janvars of Riga-based Porta Finance told AFP Friday that an influx of cash from Cyprus was likely "happening already."

But the country's financial market regulator Zakulis said that "there are no grounds to expect large inflows" of suspect funds in the coming days given the tight monitoring in place.

Both the IMF and European Commission have warned Latvia that high levels of non-resident deposits (NRDs) in local banks bring liquidity and money laundering risks.

While Latvia tries to a certain extent to lure wealthy Russians by granting EU residency permits to those who buy property, a flood of Russian cash into its bank would come at a delicate moment.

With the European Commission expected in June to give its assessment of Latvia's readiness to join the eurozone next year, Latvian officials have been quick to insist their country's financial system complies fully with EU rules.